Look at Detroit, the first major American city ever to file for bankruptcy and, after bemoaning how it got there and the hurt that’s going to follow, say thank you for this object lesson in how a bad situation can be made worse.
Maybe the United States government will finally see more clearly what debt can do when politicians play silly games, such as right now making it seem some deficit reductions have made the debt issue nothing more than a shrug of the shoulders for the federal government. All those reductions did was temporarily slow down growth of a U.S. debt that will start spurting again and threaten us mightily if we don’t address unsustainable entitlements.
More on that in a minute, but first, some discussion of Detroit, once America’s queen city of manufacturing. That began going away decades ago, not because of bad calls by government, but because of changes in the national and international economies. The rich moved to surrounding suburbs, the poor stayed put and politicians had to decide what to do.
Some of what they came up with was pretty bad. The Heritage Foundation reviews how the city borrowed too much. It raised taxes enough to discourage new businesses from coming. A major error was putting off the funding of an unaffordable retirement system for public employees, thereby running up unfunded liabilities of $9 billion owed to retirees in health and other benefits as well as pensions.
A curse of electoral politics is that those seeking office promise everything to help them get elected, knowing very well they will not be around when the bill comes due. The unions cheer them on even as the office holders then keep other services going by failing to set aside sufficient money to pay for what’s to come. Negotiating new deals with unions is tough, and it’s easy to see why: People will have to live on less than they were told they would get.
The only answer
Cities all over America have been engaging in this disreputable folderol to the tune of an overall $1.4 trillion retirement debt, though some of them, at any rate, are reportedly figuring out some answers that might help. Meanwhile, Heritage notes that Detroit has a 16 percent unemployment rate, a dysfunctional educational system, a police system that takes an hour to respond to calls, and a total unfunded liability of $18 billion.
Observers say municipal bankruptcies aren’t a fraction of what private bankruptcies are, but, for Detroit, it came to be the only answer because there just was no more money to keep things going. Michigan’s constitution prohibits cutting pensions, but federal law supersedes state law, and experts are quoted as saying a federal court will almost surely endorse some cutting, the gift, finally, of those politicians who irresponsibly pledged the impossible. Other stakeholders facing losses include bondholders. City services could be cut back, too.
No one would argue that the federal and city governments could ever be in exactly the same boat; it would be called counterfeiting if cities turned to expanding the money supply for their own purposes, for instance.
But there are principles that are much the same. Both have exceeded fiscal realities in pledges to the retired. The federal government can actually fix Social Security and Medicare with means-tested approaches that should not hurt anyone too much and the poor least, if at all. Medicare is tougher, to be sure, but would be far less difficult if there were far less demagoguery about pushing old people off cliffs and other such moral thuggery.
Let the debt get to where it’s aiming under current laws, Heritage analysts say, and trillion-dollar deficits will soon enough be back with us, interest on the debt could crowd out adequate financing for some worthy programs and economic growth could slow to painful levels.
Detroit should be a warning, not a model.